Shareholders Hurt by Number of U.S. Options Exchanges, Analyst Allen Says

Options exchanges have proliferated to the point where potential shareholders may be driven away, according to an analyst at Ticonderoga Securities LLC.

CBOE Holdings Inc.’s C2 Options Exchange, the ninth U.S. options venue, is scheduled to begin trading by the end of October. There should be three or four markets instead, unless trading volume increases, said Ticonderoga’s Christopher Allen. Richard Repetto, a principal at Sandler O’Neill & Partners LP, gave the same range for the ideal number of exchanges.

CBOE shares have tumbled 28 percent since the owner of the Chicago Board Options Exchange, the largest equities derivatives platform by trading volume, sold stock in an initial public offering in June. CBOE, Eurex’s International Securities Exchange, NYSE Euronext and Nasdaq OMX Group Inc. operate options venues that compete by offering different rules for matching orders and pricing.

“It becomes harder to understand how exchanges compete,” Allen said today at a conference held by the Futures Industry Association and Options Industry Council in New York. “People do not want to invest in businesses that are confusing for them.”

Average daily trading volume totaled 14.4 million contracts in September, down 4 percent from the same month in 2009, according to data compiled by Chicago-based Options Clearing Corp. Daily trading in the first nine months of this year averaged 15.2 million contracts, a 5.2 percent increase from the same period last year, according to OCC, which clears all trading of exchange-listed options.

‘Something Going On’

“Everyone expects an uptick in September as people come back from vacations,” Repetto said at the same event today. “We’re flat. There’s something going on.”

Repetto said that smaller stock-price swings as U.S. shares rally is probably curtailing options volume. Equity derivatives are used to hedge against losses or bet on market moves.

“There’s a basic relationship between volatility and volume, and if you don’t have volatility you don’t have volume,” Repetto said. “Just take a look at the fundamentals of volatility dropping, and you’ll be able to predict that volumes are going to decline as well.”

The Standard & Poor’s 500 Index climbed 8.8 percent last month for its best September gain since 1939. The CBOE Volatility Index fell 9 percent. When the so-called VIX closed at 21.21 on Sept. 13, it was the lowest level since May 3 for the volatility measure.

The S&P 500’s four-week historic volatility, a gauge of stock swings, has fallen by more than half since May, when a 20- minute stock market crash briefly erased $862 billion in value. Historic volatility dropped to 12.39 yesterday, the lowest since April and down from 34.20 in the period after the rout.

Thomas Wittman, head of U.S. options at New York-based Nasdaq, which has two equity derivatives venues, said it’s more likely that the number of options exchanges will increase than decrease. Jeromee Johnson of Bats Global Markets agreed.

“I think we see 12 options exchanges before we see 6,” said Johnson, vice president for market development at Bats in Kansas City, Missouri. The firm introduced an options market in February.

To contact the reporters on this story: Nina Mehta in New York at nmehta24@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.